Thirty Years in Finance

What Hasn’t Changed

Thirty years ago this week, I walked into my first job in finance. I’d like to say I have vivid recollections but the truth is, memories of my first day are hazy.

I remember the building: a converted car park close to London Bridge on the River Thames; visitors entered on the riverside, staff round the back. I remember the people: fellow graduate trainees from all over the world, naive to the workings of the City but keen to impress. And because I kept my offer letter, I remember the terms of my employment: a starting salary of £22,000 ($35,000) plus a signing-on bonus of £2,000 to buy suits; hours of work 9-5 Monday to Friday (however, you will be expected to devote sufficient time to your duties which may require you to attend the office or to be available outside these hours and days…); and a new policy introduced just a few months before my arrival: no smoking in the office. 

In the time that has elapsed, a lot has changed. The building is no longer there, nor the firm. Even the firm that bought the firm has ceased to exist. The people I spent three months bonding with over bond math have mostly churned through the industry. As a reflection of how fashions have evolved since we sat in a training room together, our standard-issue copy of Principles of Corporate Finance (4th ed) has been revised and updated to include sections on corporate governance and risk management—issues fledgling bankers in the 1990s didn’t have to worry about. 

But a lot also remains the same. As I look back on my experiences entering the industry 30 years ago, it’s the constants that are more interesting—in the structure of the industry, in markets and in career progression. Let’s take a look at what hasn’t changed:

Americans Do It Better

“Don’t work for an American firm,” they said, “they’ll work you too hard.” No problem, I thought, there’s a long list of British firms I can apply to. I dispatched my résumé to all of them: Barings, Rothschild, NatWest, Barclays de Zoete Wedd, SG Warburg, Kleinwort Benson and, for contrast, Chase Manhattan because I knew someone who worked there. 

One by one they called me in for interview. (All except Barings who turned me down flat, more fool them). SG Warburg made me submit a handwriting sample, a policy initiated by Sir Siegmund, a keen proponent of graphology. An options trader at Chase threw me the Monty Hall problem, the first time I’d heard it. One firm arranged for the door knob to the meeting room to fall off in my hand and, when I stumbled in, they told me I was 30 seconds late which left us with only fourteen and a half minutes of interview time. “How many seconds is that?” they barked. 

I succeeded in passing these odd initiation tests and was offered a number of positions: M&A at one firm, investment management at another. But I was attracted to the hum of equity markets and so I joined Barclays de Zoete Wedd (BZW) to take up a role in equity research (the £2k signing-on bonus helping me to make up my mind). 

Unbeknown to me, the firm wasn’t all that. It had been conceived a decade earlier as an outlet for Barclays’ investment banking ambitions and for a while it seemed to be doing well. The year before I arrived, BZW earned profits of £501 million and generated a return on capital in excess of 40%. Staff of 6,000 shared a bonus pool of £100 million. But results were flattered by the inclusion of Barclays’ legacy money market and treasury operations and when bond markets collapsed in 1994, its weak franchise was left exposed. Profits halved and after other firms recovered in 1995, BZW was left trailing.

The picture was similar across many of the other UK banks I had applied to. Although London had established itself as the global capital for cross-border financial services, with dominant market shares in international equities (64%) and currency trading (27%), its own institutions were losing ground to American firms able to leverage domestic profitability to subsidize expansion abroad. In the 12 months after I started work, Barings went bust, then Warburg sold itself to Swiss Bank Corporation (now part of UBS) and then Kleinwort Benson sold to Dresdner Bank (now part of Commerzbank). 

Meanwhile, Barclays’ CEO, Martin Taylor, was having doubts about BZW’s viability. He was already fed up that although the firm made up only a tenth of Barclays’ group profits, it consumed 70% of board time, 85% of audit and risk time and 98% of remuneration committee time. “BZW was delusional and had fooled itself into thinking that its time had come,” Philip Augar, author of a book about the bank’s history records Taylor thinking. “The expensive recruits were failing to deliver, technology needed big investment and cultural tensions between the warring tribes had to be settled.”

In 1997, Barclays got out. It sold BZW’s equities and corporate finance business to Credit Suisse for £100 million (although it was liable for write-offs and operating losses of £688 million), retaining only the fixed income operations of which I had no part. It came at a time when American firms were growing ever larger. A few days earlier, Travelers announced the acquisition of Salomon Brothers which it planned to merge into Smith Barney (now part of Citi). Before the year was out, NatWest, the only British firm that I had applied to which was still standing (except for Rothschild) also sold its European equities business, to Bankers Trust (now part of Deutsche Bank).

Since then, American firms have continued to dominate the industry. Year to date, they take the top four slots in European M&A by deal value. In equities trading and in fixed income, they outrun European firms in terms of revenue. For an eager new graduate, it means there are fewer firms to apply to, but at least their viability is assured. 

Interlude: Get Involved

After spending three months in a classroom with fellow graduate trainees, I was dispatched to the trading floor. I’ve written about it before:

Most of the trading floor was the territory of the UK stock trading business. UK traders sat at its center, conveying prices for Marks’s and BATs (top ten stocks, both) in unfiltered Cockney. Around them, salespeople, recruited from the ranks of the British Army and the England rugby team. And then, the analysts—my sort, except their focus on UK stocks invested them with more influence. Between them, they steered vast amounts of money around the UK stock market, then the third largest in the world behind New York and Nasdaq. In the decade I joined, the benchmark FTSE 100 index would triple and the London market would grow to host around three times more companies than rival Paris, including four of the 25 most valuable companies in the world. 

In one of my first weeks, I was invited to spend a few days at the epicenter of the floor with the traders. I sat on the shoulder of one as he guided me round his screens and showed me how he managed his order book. The first day, I looked on passively, hoping to soak it all in. After the market closed, he looked at me. “Get involved,” he said. “You’ve got to get involved.” 

It was sound advice. The trader encouraged me to answer the phone, to be present, to find ways to help. I can’t say I excelled during my short stint on the trading desk, but the idea stuck with me, always to get involved. If I have one nugget of advice for anyone starting in the industry or looking to enter it, it’s get involved. 

Boom and Bust

They were still talking about Black Monday when I turned up for work seven years after the event. On Monday, October 19, 1987, the S&P 500 index plunged around 20% in a single day, taking global stock markets down with it. The move confounded expectations. My namesake (Professor) Mark Rubinstein (whose contribution to options pricing theory made me a star on the derivatives desk) figured that, on the basis of the market’s historic volatility, Black Monday was a “-27 standard deviation event with a probability of 10^-160, which is virtually impossible.” In other words, had the market been open every day since the creation of the Universe, the odds would still have been against it falling that much on a single day. 

Yet it happened. Initially, commentators in search of a narrative pointed towards an overvalued market or the prospect of a currency war. But the crash had much more to do with the structure of the market itself than to exogenous events. It stemmed from a crowded use of portfolio insurance, a dynamic hedging strategy that investors were increasingly deploying to manage risk. For the strategy to work, the market had to be liquid: If a hedge cannot be readily adjusted as underlying conditions change, then it ceases to be a true hedge. On an individual portfolio basis, liquidity was ample. But if everyone starts doing the same thing, that’s when things can go wrong. As Richard Bookstaber, one of the architects of the strategy at Morgan Stanley, says, it’s “a little like everyone on a cruise ship trying to pile into a single lifeboat: it won’t float.”

On Monday morning, October 19, 1987, everybody who was running a portfolio insurance program began selling stock futures to hedge a small decline in the index from Friday. A cycle developed with such force that buyers were scared away. The demand for selling erupted more quickly than the price could attract supply: Liquidity drained from the market and $500 billion of value was erased in a couple of hours. 

By the time I landed in the industry, this was old news; the world had moved on to a new crisis. In December 1994, the Mexican government devalued their currency against the US Dollar, sparking a sell-off in Mexican assets. By itself, the episode could have been contained, but it led to capital flight from emerging markets more broadly. Eventually, a US-coordinated bailout was required to arrest the downturn. Like in 1987, endogenous factors contributed to the collapse – this time, financial contagion. Argentinian assets weren’t that bad (yet) but their proximity to Mexico persuaded investors to dump them regardless. 

Market crises have been a persistent feature of my time in the industry. After Mexico there was LTCM, the dotcom bust, the “quant quake” of August 2007, the global financial crisis, the “flash crash” and more. They are characterized by some combination of liquidity collapse, forced asset selling and contagion. It’s an issue we discussed in How Markets Work.

My 30 year anniversary was almost punctuated by another such event. At the beginning of last month, markets sold off viciously, initially because of a disappointing US employment report. But the move was amplified by deleveraging pressures in a thin summer market. A period of benign volatility prior to August led market participants to accumulate leveraged positions including carry trades funded in low-yielding currencies such as yen. The Bank of International Settlements (BIS) estimates that some $250 billion of foreign exchange carry trades may have been put on. The initial wobble forced a rapid unwind impacting multiple markets and asset classes. At the peak of the stress, the Japanese TOPIX index was down 12% in a single day and the VIX volatility gauge briefly registered levels not seen since Covid. 

The market recovered quickly, but not before old-timers registered a murmur of recognition. “The event was yet another example of volatility exacerbated by procyclical deleveraging and margin increases,” a BIS post-mortem declared. “Although an outright market dysfunction was averted this time, the structural features of the system underpinning such episodes deserve continued attention by policymakers.”

Barclays de Zoete Wedd is long gone and my fellow graduate trainees have moved onto other things, but some things never change.

Postscript

I was lucky. It feels like it’s tougher to get a job in finance these days. First, you need an internship, but they’re hard to get. JPMorgan head of Asset and Wealth Management Mary Erdoes revealed at the bank’s recent investor day that the firm had 493,000 applications for 4,000 slots last summer. That’s an acceptance rate of 0.8%. 

Then, after 9-12 weeks of toil, you need to convert the internship into a full-time offer. Typically, between 50% and 75% of summer analysts receive job offers. Key is to show commitment during the program. There is one thing you must ask colleagues every day before you leave the office, advises the head of Invest & You, a firm that helps graduates get into banking: “Is there anything I can do?”

To improve your chances of getting the internship, you could hire a firm like Invest & You to provide mock interview sessions and résumé review. Or you could enter the process even earlier and secure a week-long spring internship the year before. According to eFinancialCareers, one London School of Economics student completed nine of them last year, after applying to 18 in total. The website reckons the record may lie with Haydn Pole, a former economics student, who completed 11 spring week internships in 2014, parlayed one into a summer internship and is now a vice president in debt capital markets at Barclays. 

The picture is similar across private equity and hedge funds. “This year, we had 62,000 unique applicants for 169 first-year analyst positions, equating to a selection rate of less than 0.3%,” Blackstone CEO told investors on his July 2023 earnings call. “Getting an entry-level job at Blackstone is twelve times harder than getting into Harvard. I doubt I’d be able to be hired today. Not sure that’s a great thing.”

My advice? Get involved.

This issue of Net Interest is dedicated to my classmates on the BZW graduate training program: Anthony, Alexina, Stuart, Mervyn, Jane, Simon, Rahul, Sarah, Martyn, Chris, David, Richard, Rob, Jody, Mojmir, Joseph, Edmond, Yoshiko, Elissa, Josef, Dae Young, Richard, Natalia, Andrea, Keiko, Satoru, Alicia, Virginia and Andrew.

Further Reading

How Markets Work

What Sort of a Business is Investment Banking?

A Market Without Investors